Dear all, I have a question regarding valuation using FCF. It's not CFA related but really appreciate if someone could help! Thanks
assume at year 0, company's B/S has the following:
Cash = 10
PPE = 0
Debt = (10)
assume in year 0, company ABC wants to purchase a machine for 30 using DEBT FINANCING such that B/S in year 0 becomes:
Cash = 10
PPE = 30
Debt = (40)
ok, now, FCF of the operation. assume FCF from operation is 20/year
therefore: FCF
year 0 1 2 3 4
FCF oper - 20 20 20 20
PPE Capex (30) - - - -
FCF (30) 20 20 20 20
assume wacc = 10% so NPV of FCF = 33.4
Now, my questions is: What should the valuation of company ABC? Should it be just the NPV of FCF = 33.4? OR, should the value of 33.4 be adjusted by debt + cash value at year 0 such that Valuation = 33.4 - 40 (debt) + 10 (cash) = 33.4 - (30) = 3.4?
But if the latter case is true, didnt the cost of machine (30) is deducted twice? (1 from PPE capex from FCF, 1 from the net debt at year 0)
Do we need to adjust the valuation by the net debt at year 0? or the WACC has already accounted for the capital structure so that no deduction of net debt at year 0 is needed?
Sorry I was confused. I deeply appreciate for your help!
assume at year 0, company's B/S has the following:
Cash = 10
PPE = 0
Debt = (10)
assume in year 0, company ABC wants to purchase a machine for 30 using DEBT FINANCING such that B/S in year 0 becomes:
Cash = 10
PPE = 30
Debt = (40)
ok, now, FCF of the operation. assume FCF from operation is 20/year
therefore: FCF
year 0 1 2 3 4
FCF oper - 20 20 20 20
PPE Capex (30) - - - -
FCF (30) 20 20 20 20
assume wacc = 10% so NPV of FCF = 33.4
Now, my questions is: What should the valuation of company ABC? Should it be just the NPV of FCF = 33.4? OR, should the value of 33.4 be adjusted by debt + cash value at year 0 such that Valuation = 33.4 - 40 (debt) + 10 (cash) = 33.4 - (30) = 3.4?
But if the latter case is true, didnt the cost of machine (30) is deducted twice? (1 from PPE capex from FCF, 1 from the net debt at year 0)
Do we need to adjust the valuation by the net debt at year 0? or the WACC has already accounted for the capital structure so that no deduction of net debt at year 0 is needed?
Sorry I was confused. I deeply appreciate for your help!